Ohio Security Insurance Company v. K R Enterprises, Inc. et al

Filing 54

MEMORANDUM OPINION AND ORDER: Pending before the court are the defendants' motions to either dismiss this action or, in the alternative, stay this case until resolution of the underlying state court action. (ECF Nos. 22, 24, and 33). For the re asons set forth herein, those motions are DENIED. Applying the four Nautilus factors to the instant case, the court is not persuaded that Ohio Security's rights and obligations can be fully resolved through the pending state actions. Based on the foregoing, the court hereby DENIES defendants' Motions to Dismiss and/or Stay. Signed by Senior Judge David A. Faber on 3/23/2017. (cc: counsel of record) (mk)

IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
AT BLUEFIELD
OHIO SECURITY INSURANCE COMPANY,
Plaintiff,
v.

CIVIL ACTION NO. 1:15-16264

K R ENTERPRISES, INC., et al.,
Defendants.

MEMORANDUM OPINION AND ORDER
Pending before the court are the defendants’ motions to
either dismiss this action or, in the alternative, stay this case
until resolution of the underlying state court action.
22, 24, and 33).

(ECF Nos.

For the reasons set forth below, those motions

are DENIED.
I.

Factual and Procedural Background

Plaintiff Ohio Security Insurance Company (“Ohio Security”)
is an insurance company organized under the laws of New Hampshire
with its principal place of business in Boston, Massachusetts.
See Amended Complaint ¶ 5.

Defendant K R Enterprises, Inc. (“K R

Enterprises”) is a Virginia corporation with its principal place
of business located in Martinsville, Virginia.

See id. at ¶ 6.

Defendant Jackson Hewitt, Inc. is a Virginia corporation with its
principal place of business in Parsippany, New Jersey.
at ¶ 7.

See id.

During the relevant time period, Ohio Security issued a

BusinessOwners Liability Policy to K R Enterprises, Policy Number

BZS (15) 56 08 16 29.

See Amended Complaint at ¶ 60.

The Ohio

Security Policy also included Data Compromise and CyberOne
Coverage endorsements.

See id. at ¶¶ 73 and 75.

The instant dispute centers on fraudulent tax returns filed
by defendant Jeremy Evans, a former employee of defendant K R
Enterprises, doing business as Jackson Hewitt.1

Specifically,

former customers of K R Enterprises have alleged that Evans
improperly accessed the records of K R Enterprises to obtain
their personal and confidential information for the purpose of
fraudulently filing their 2014 income tax returns.

All of the

former customers had sought assistance preparing their 2013 tax
returns from K R Enterprises and their confidential information
had been saved in the company’s database.
Upon discovering Evans’ conduct, these customers of K R
Enterprises filed suit in the Circuit Court of McDowell County,
West Virginia, against Evans, K R Enterprises, and Jackson Hewitt
raising various state law claims including, but not limited to,
Breach of Fiduciary Duty, Negligence, and Invasion of Privacy.
There are six of these lawsuits currently pending in the McDowell
County Circuit Court2 and, as of the date these motions were

1

According to the Amended Complaint, there was a franchise
agreement between K R Enterprises and Jackson Hewitt. See
Amended Complaint at ¶ 3.
2

These lawsuits are as follows: Bailey, et al. v. Jackson
Hewitt, Inc., et al., Civil Action No. 15-C-50; Morgan v. Jackson
Hewitt, Inc., et al., Civil Action No. 15-C-49; Presley, et al.
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filed in this court, a motion to consolidate the underlying tort
cases had been filed in the state court.

All of the state

lawsuits allege that Evans was arrested on or about February 4,
2015, at a K R Enterprise location and that Evans admitted to
police that he had used the customers’ 2013 tax return
information to fraudulently file 2014 tax returns in their names.
For his part, Evans faces criminal charges of identity theft,
attempted felony, forgery, uttering, petit larceny, and
fraudulent schemes.
On December 18, 2015, Ohio Security Insurance Company filed
the instant declaratory judgment action on the basis of diversity
jurisdiction pursuant to 28 U.S.C. § 1332 and, on March 14, 2016,
it filed an amended complaint.

Ohio Security asks this court to

determine that it has no duty to defend or indemnify K R
Enterprises, Evans, or Jackson Hewitt3 under the BusinessOwners
liability coverage and/or or the Data Compromise and CyberOne
coverage for the six underlying lawsuits.
Defendants’ motions to dismiss and/or stay urge the court to
decline to exercise its authority under the Declaratory Judgment

v. Jackson Hewitt, Inc., et al., Civil Action No. 15-C-48; Sacra,
et al. v. Jackson Hewitt, Inc., et al., Civil Action No. 15-C117; Vanover, et al. v. Jackson Hewitt, Inc., et al., No. 15-C58; Wheeler, et al. v. Jackson Hewitt, Inc., et al., No. 15-C-48.
See Amended Complaint at ¶¶ 18-59.
3

The Amended Complaint alleges that Jackson Hewitt might be
an additional insured under the Policy. See Amended Complaint at
¶¶ 80-82.
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Act in favor of allowing the issue of coverage to be resolved by
the pending state actions.

II.

Analysis

The Federal Declaratory Judgment Act (“the Act”) provides in
pertinent part that, “[i]n a case of actual controversy within
its jurisdiction, . . . any court of the United States, upon the
filing of an appropriate pleading, may declare the rights and
other legal relations of any interested party seeking such
declaration, whether or not further relief is or could be
sought.”

28 U.S.C. § 2201.

This Act, which is permissive on its

face, is understood to bestow upon federal courts “unique and
substantial discretion in deciding whether to declare the rights
of litigants.”

Wilton v. Seven Falls Co., 515 U.S. 277, 286

(1995)(noting language of statute that a court “may” declare the
rights and legal relations of interested parties).
In exercising its discretion, a court is to consider (1)
whether the judgment would “serve a useful purpose in clarifying
and settling the legal relations in issue,” and (2) whether the
judgment would “terminate and afford relief from the uncertainty,
insecurity, and controversy giving rise to the proceeding.”
Aetna Cas. & Sur. Co. v. Quarles, 92 F.2d 321, 325 (4th Cir.
1937).

Courts are cautioned against issuing declaratory

judgments where the result would be “to try a controversy by

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piecemeal, or to try particular issues without settling the
entire controversy, or to interfere with an action which has
already been instituted.”

Id.

The Fourth Circuit Court of Appeals has enunciated four
specific factors by which the court’s analysis is to be guided:
(i) the strength of the state’s interest in having the
issues raised in the federal declaratory action decided
in the state courts; (ii) whether the issues raised in
the federal action can more efficiently be resolved in
the court in which the state action is pending; . . .
(iii) whether permitting the federal action to go forward
would result in unnecessary “entanglement” between the
federal and state court systems, because of the presence
of “overlapping issues of fact or law” [; and (iv)]
whether the declaratory judgment action is being used
merely as a device for “procedural fencing” – that is,
“to provide another forum in a race for res judicata” or
“to achieve a federal hearing in a case otherwise not
removable.”
Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 257 (4th Cir.
1996)(quoting Nautilus Ins. Co. v. Winchester Homes, Inc., 15
F.3d 371, 376 (4th Cir. 1994)).
Yet, clear as it is that district courts have
discretion to stay or dismiss declaratory judgment
actions when parallel state proceedings are underway
that present opportunity for ventilation of the same
state law issues, it is equally clear that this
discretion is by no means unfettered. Indeed, allowing
unfettered discretion would not give effect to
Congress's clear intention in enacting the Declaratory
Judgment Act to make the declaratory remedy available,
as a general matter, in federal lawsuits. Thus, absent
a good reason not to exercise jurisdiction, federal
courts should hear declaratory judgment actions and
provide declaratory relief where it is warranted by law
and by the facts and circumstances of a particular
case.

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Zurich American Ins. Co. v. Public Storage, 697 F. Supp.2d 640,
643 (E.D. Va. 2010) (internal citations and quotations omitted).
With this background in mind, the court concludes that
consideration of the Nautilus factors weighs in favor of the
court’s retaining jurisdiction over this matter.
A.

State Interest
As to the first factor, whether West Virginia has a strong

interest in deciding the issue, Ohio Security argues that it does
not because, according to Ohio Security, Virginia law governs the
interpretation of the policy.

However, certain of the defendants

contend that West Virginia law should govern the interpretation
of the policy.

See ECF No. 31.

Under West Virginia law, “the interpretation of insurance
policy coverage, rather than liability, is treated as a contract
question for purposes of conflicts analysis.”

Liberty Mut. Ins.

Co. v. Triangle Indus., Inc., 390 S.E.2d 562, 565 (W. Va. 1990).
West Virginia courts have traditionally applied the doctrine of
lex loci contractus and held that the law of the state where the
contract was made or to have been performed governs the
interpretation of the contract.

Johnson v. Neal, 418 S.E.2d 349,

341-52 (W. Va. 1992) (acknowledging West Virginia adheres to the
“normal rule of applying in contract cases the ancient doctrine
of lex loci contractus”)

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This general rule is subject to an exception.

“[I]n a case

involving the interpretation of an insurance policy, made in one
state to be performed in another, the law of the state of
formation of the contract shall govern, unless another state has
a more significant relationship to the transaction and parties,
or the law of the other state is contrary to the public policy of
this state.”

Triangle Indus. 390 S.E.2d at 565.4

Relying on

Section 6 of the Restatement (Second) of Conflict of Laws, the
Triangle court considered a number of factors in identifying the
state with the most significant relationship, including:
(a) the needs of the interstate and international
systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states
and the relative interests of those states in the
determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field
of law,
(f) certainty, predictability and uniformity of result,
and
(g) ease in the determination and application of the
law to be applied.

4

Relying on Section 6 of the Restatement (Second) of
Conflict of Laws, the Triangle court held that the law of the
state of contract, New Jersey, should apply to a commercial
general liability policy covering risk in several states,
including West Virginia. Liberty Mut. Ins. Co. v. Triangle
Indus., Inc., 390 S.E.2d 562, 567 (W. Va. 1990).
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Id. at 567.
In this case, Ohio Security has proffered evidence that the
policy herein was negotiated by a Virginia broker, Burch-HodgesStone, Inc., of Martinsville, Virginia, and issued to K R
Enterprises, a Virginia corporation, to an address in
Martinsville, Virginia.

See Exhibit G to Amended Complaint at

OSIC000001 (ECF No. 21-7).

Because the policy was issued in

Virginia, the court begins with the presumption that Virginia law
applies.

No other state has a more significant relationship to

the transaction and the parties than Virginia.

The Ohio Security

Policy identifies thirty-two K R Enterprise locations, six of
which are located in West Virginia and twenty-six of which are
located in Virginia.

See id. at OSIC0000014-15.

Furthermore,

the court does not find (nor do defendants argue) that the law of
Virginia is contrary to the public policy of West Virginia.
Therefore, under the rule of Triangle, Virginia law should govern
interpretation of the Ohio Security policy and there are good
reasons for doing so.
As explained in Triangle Industries, application of the
law of the state of formation ensures certainty,
predictability, and uniformity of result and ease in
the determination and application of the law to be
applied. Furthermore, the uniformity and
predictability of this rule satisfy the needs of the
interstate system of the insurance industry. Finally,
application of this rule results in the selection of a
single rule of law for the contract, and thus, the
parties to the contract do not have to negotiate
separate contracts for each state where an insured risk
is located.
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Energy Corp. of America v. Bituminous Casualty Corp., 543 F.
Supp.2d 536, 543 (S.D.W. Va. 2008).
Based upon the foregoing authorities, the court concludes
that, at this juncture and unless defendants come forward with
evidence to prove otherwise, Virginia law applies to the policy
issued by Ohio Security to K R Enterprises.

Given that Virginia

law governs the policy, the court can see little interest why a
West Virginia court would have a strong interest in interpreting
an insurance policy governed by Virginia law.

See Western World

Ins. Co., Inc. v. Sur Developers and Builders, Inc., Civil No.
WDQ-14-3967, 2015 WL 5675280, *6 (D. Md. Sept. 24, 2015) (“A
state's interest in adjudicating a dispute depends, in part, on
whether its law applies to the dispute.”).

However, “because

there are no federal claims, this Court’s interest in resolving
the declaratory action is also not strong.”

Id.

Accordingly,

this factor is neutral.
B.

Efficiency
When addressing the efficiency factor, the Fourth Circuit

has urged district courts to conduct a “careful inquiry into ‘the
scope of the pending state court proceeding,’ including such
matters as ‘whether the claims of all parties in interest [to the
federal proceeding] can satisfactorily be adjudicated in [the
state proceeding].”

Nautilus, 15 F.3d at 378-379 (quoting

Brillhart v. Excess Ins. Co. of Am., 316 U.S. 491, 495 (1942)).

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Ohio Security argues that the state court litigation will
not answer the question of whether Ohio Security owes coverage to
Jackson Hewitt as an additional insured.

Jackson Hewitt has

since supplemented the record to show that the state court has
allowed it to amend its Answer and filed Third Party Complaint to
assert its claims against Ohio Security. See ECF No. 50.

Ohio

Security also argues that it may not obtain relief against
defendant Jeremy Evans in state court because he is incompetent
because of his incarceration.

To that end, Ohio Security has

moved for appointment of a guardian ad litem on behalf of Evans
in this proceeding.

Because the state court proceedings would

not resolve all the issues raised in the instant declaratory
judgment action, the court concludes that dismissing this case
would not promote efficiency because Ohio Security’s claims
against Jeremy Evans would not be resolved.
Accordingly, the court finds that the “efficiency” factor
weighs slightly in favor of this court accepting jurisdiction.5
C.

Entanglement
As to the third factor, whether overlapping issues of fact

or law might create unnecessary entanglement between state and

5

Furthermore, on March 17, 2017, Ohio Security has recently
sought leave of this court to file an amended complaint seeking a
declaration of rights as to another policy issued to K R
Enterprises, as well as adding another defendant, Cathy S.
Goodman, who has recently filed a lawsuit in the Circuit Court of
McDowell County. See ECF No. 52.
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federal courts, the court finds that allowing this action to go
forward would not create unnecessary entanglement.

With respect

to the question of whether a district court should decline to
exercise jurisdiction over a declaratory judgment action when it
is being asked to determine whether an insurer has a duty to
defend an insured under Virginia law because of unnecessary
entanglement, the United States Court of Appeals for the Fourth
Circuit has answered the question in the negative.

See Penn-

America Ins. Co. v. Coffey, 368 F.3d 409, 414 (4th Cir. 2004).
In Coffey, a restaurant patron filed a lawsuit in state court
alleging state law claims against a restaurant for injuries he
sustained in the parking lot when he was struck by an automobile
driven by another customer.

See Coffey, 368 F.3d at 411.

The

liability insurer filed a declaratory judgment action in federal
court against the insured restaurant and others seeking a
declaration that it had no duty to defend or indemnify the
restaurant in the underlying state court action.
411–12.

See id. at

One of the defendants filed a motion to dismiss the

declaratory judgment action, “urging the district court not to
adjudicate the coverage question while the state court case was
pending.”

Id. at 411.

The district court dismissed the action,

concluding that deciding whether the insurer was obligated to
defend and indemnify the restaurant “would require resolution of

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the same factual issues of causation raised in [the] underlying
state court action.”

Id. at 411-12.

The Fourth Circuit ruled that the district court abused its
discretion in declining to hear the liability insurer's
declaratory judgment action.

See id. at 414–415.

In disagreeing

with the district court that resolution of the coverage issue
would “result in entanglement, through gratuitous interference,
with state court proceedings by preempting critical factual
findings that the state court [would] have to make,” the appeals
court noted:
[T]he duty-to-defend question in this case will not
require the district court to resolve factual questions
at all. It need only decide such coverage by comparing
what [plaintiff] has alleged in the state court action
with the language of the [ ] insurance policy. Under
Virginia law, an insurer's duty to defend arises
“whenever the complaint against the insured alleges
facts and circumstances, some of which, if proved,
would fall within the risk covered by the policy.”
Brenner v. Lawyers Title Ins. Corp., 240 Va. 185, 397
S.E.2d 100, 102 (1990); see also Va. Elec. & Power Co.
v. Northbrook Prop. & Cas. Ins. Co., 252 Va. 265, 475
S.E.2d 264, 265-66 (1996). And there is no duty to
defend “if it appears clearly that the insurer would
not be liable under its contract for any judgment based
upon the allegations.” Brenner, 397 S.E.2d at 102
(emphasis added). Although an insurer's duty to
indemnify will depend on resolution of facts alleged in
the complaint, no such factfinding is necessary if
there is no duty to defend because the allegations,
even when taken as proved, would fall outside the
policy's coverage.
Id. at 413.
Pursuant to Coffey, under Virginia law, determining whether
an insurer has a duty to defend is relatively straightforward.
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In deciding whether Ohio Security has a duty to defend K R
Enterprises, Jackson Hewitt and Evans in the underlying lawsuits,
under Virginia's “eight corners rule” the court looks only to the
underlying complaints and determines whether the allegations
therein come within the scope of the Policy's coverage.

AES

Corp. v. Steadfast Ins. Co., 725 S.E.2d 532, 535 (2012); see also
CACI Int’l, Inc. v. St. Paul Fire and Marine Ins. Co., 566 F.3d
150, 155–56 (4th Cir. 2009); Fuisz v. Selective Ins. Co. of Am.,
61 F.3d 238, 242 (4th Cir. 1995).

If the complaint alleges any

facts that, if proved, would render Ohio Security liable under
the Policy for a judgment against K R Enterprises and Jackson
Hewitt, then Ohio Security must defend them in the underlying
lawsuits.

See CACI, 566 F.3d at 155.

But if it is clear that

Ohio Security would not be liable under the Policy for any
judgment based on the allegations in the state court complaints,
then Ohio Security has no such duty to defend.

See id.

As to the duty to indemnify, it is narrower than the duty to
defend.

See Brenner v. Lawyers Title Ins. Corp., 397 S.E. 2d

100, 102 (Va. 1990) (An “insurer's obligation to defend is
broader than its obligation to pay.”).

Therefore, if there is no

duty to defend, there can be no duty to indemnify.

See Marks v.

Scottsdale Ins. Co., 791 F.3d 448, 454 (4th Cir. 2015) (“Because
it is clear from the Marks Suit complaint that Scottsdale would
not be liable for any judgment against Johnson, Scottsdale has no

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duty to defend Johnson.

It follows that Scottsdale also has no

duty to indemnify Johnson in the Marks suit.”); Morrow Corp. v.
Harleysville Mut. Ins. Co., 101 F. Supp.2d 422, 426-27 (E.D. Va.
2000) (“[A] duty to defend may arise even though ultimately no
duty to indemnify is found, but if there is no duty to defend ab
initio, there can be no duty to indemnify.”).
However, should this court determine that a duty to defend
exists, it may reserve its ruling on the indemnification question
until the conclusion of the underlying lawsuits.

See Builders

Mutual Ins. Co. v. Futura Group, LLC, 779 F. Supp.2d 529, 238
(Apr. 21, 2011) (“Of course, if there is no duty to defend, then
there can be no duty to indemnify, and deciding that issue as
early as possible promotes efficiency.

If there is a duty to

defend, then this Court will await the outcome of the state court
case before considering the duty to indemnify issue, again
promoting efficiency by not duplicating the fact finding
conducted in the state court.”).
For this reason, the court can discern no entanglement
between the issues raised in this lawsuit and the underlying
lawsuits.

Accordingly, the court finds that the “entanglement”

factor weighs in favor of accepting jurisdiction.
D.

Procedural Fencing
As to the fourth Nautilus factor, although Ohio Security

filed this action after the Sacra defendants amended their state

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law complaint to add Ohio Security as a defendant, the court is
unpersuaded that the filing of this lawsuit was done merely as a
device for procedural fencing.
the other five lawsuits.

Ohio Security was not a party to

Furthermore, as discussed earlier, the

Sacra lawsuit would not resolve Ohio Security’s obligations vis a
vis Jeremy Evans.

Therefore, the court cannot conclude that Ohio

Security’s filing of a comprehensive complaint, seeking to
determine its rights and responsibilities in all the underlying
lawsuits as well as with respect to Evans and Jackson Hewitt was
mere procedural fencing.6

For these reasons, the court finds the

fourth Nautilus factor weighs neither for or against dismissal of
this action.

III.

Conclusion

Applying the four Nautilus factors to the instant case, the
court is not persuaded that Ohio Security’s rights and
obligations can be fully resolved through the pending state
actions.

Based on the foregoing, the court hereby DENIES

defendants’ Motions to Dismiss and/or Stay.
The Clerk is directed to send copies of this Memorandum
Opinion and Order to counsel of record.

6

The court is aware that the McDowell County Circuit Court
has recently given Jackson Hewitt and K R Enterprises leave to
amend in order to assert claims against Ohio Security in all of
the state court actions.
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It is SO ORDERED this 23rd day of March, 2017.
ENTER:

David A. Faber
Senior United States District Judge

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